Erik Lueth, senior regional economist, Royal Bank of Scotland:
Joseph Yam’s suggestion is significant, coming from Hong Kong’s former monetary chief who helped create and defend the peg for the best part of his career. However, I think it is unlikely Hong Kong would abandon the peg within the next seven-to-ten years.
To begin with, those who say Hong Kong’s economy is more aligned with China’s business cycle than that in the US are wide of the mark. Yes, mainland Chinese come to Hong Kong in their droves to shop and buy property, but the territory is also a global financial and shipping centre. As a result, its growth profile is much more correlated to the global and US business cycles, than to China’s.
The peg’s detractors argue that de-coupling would help cool the property market by raising interest rates. Certainly, property prices and sales are once again on the rise after a short hiatus in the second half of last year, but, this can largely be attributed to interest from mainland buyers who mostly pay cash. Higher interest rates would have little practical effect in cooling the real estate market.
I also see no indication that the Hong Kong dollar is terribly undervalued. Both nominal and real effective exchange rates have been pretty flat over recent years.
Many observers now believe China’s offshore currency, the CNH, is fairly valued. Given that the Hong Kong dollar should therefore not significantly depreciate further against the CNH there is little need for a re-peg. This also seems to be the prevailing view in Hong Kong where residents have started to draw down CNH deposits.
Markets have largely shrugged off Yam’s intervention. That suggests his idea may have more to do with him missing the limelight than offering a credible policy option for Hong Kong’s financial authorities.
Adrienne Lui, Hong Kong economist, Citi:
Our long-held house view is that the peg system status quo prevails. One frequently cited argument against keeping the peg is inflation (both imported consumer and asset price inflation). The argument usually goes as follows: along with renminbi appreciation and Hong Kong importing most of its basic necessities from across the border, Hong Kong citizens (in particular the lower income group) suffer from higher import prices when the Hong Kong dollar is linked to the depreciating US dollar.
However, the current consumer price index trajectory and fading hopes of substantial renminbi appreciation lately do not call for an urgent need to take away the peg. We expect CPI inflation to come down to 2.9% year-on-year by the end of 2012 given the slowing economy, high base effects and moderating pass-through of private housing rentals.
Another argument against the peg is that capital inflows would drive asset bubbles in Hong Kong - we believe that capital inflows into asset markets are determined by many factors, with or without the peg. In addition, we believe the lack of political will, the worry of losing policy credibility and additional uncertainty created from tinkering with the peg continue to be reasons why it should remain the status quo.
We reiterate that the Hong Kong dollar will eventually be re-pegged to the renminbi once and for all, but this will only come after full capital-account liberalization in China.
Frances Cheung, senior strategist Asia ex-Japan, Credit Agricole CIB:
The typical argument for a de-peg had been a very weak US dollar, inflation pressure for Hong Kong, and a rapidly appreciating renminbi. These are not pressing issues right now. To move while not being under pressure may be appropriate for the case of renminbi. However, it may be more desirable for Hong Kong to move when the Hong Kong dollar is under strong appreciation pressure, to avoid any overshot to the weak side. Timing is not the best now given the external uncertainties.
That said, we would be surprised if the Hong Kong Monetary Authority is not prepared for a change some day. A widening of the band is the worst strategy, possible. It would trigger speculations and make the HKMA’s job tough to maintain the band. A peg to the renminbi is also difficult as the renminbi is not yet fully convertible. A link to a basket of currencies appears the most viable way out.
More than half of Hong Kong’s exports go to China. To reduce the weight/get rid of this not fully-convertible currency, a basket could take into account the weights of the renminbi itself. Or, the basket could be designed with an initial fixed portion, say, 80% in US dollars, with the remaining 20% being a basket. This 80% can then be gradually reduced.